Fed’s Kaplan Expects Continued Oil Price Volatility Until Year End

Aug 3, 2016

Federal Reserve Bank of Dallas President Robert Kaplan said Tuesday that the central bank should remove accommodative monetary policy in a “gradual and patient manner” in light of continuing challenges facing the U.S. economy.

Mr. Kaplan, in prepared remarks before the Official Monetary and Financial Institutions Forum in Beijing, said that U.S. gross domestic product figures in 2016 have so far been disappointing. The U.S. economy grew just 1.2% in the second quarter, less than the 2.6% that had been expected by economists surveyed by The Wall Street Journal.

Mr. Kaplan also noted that inflation continues to run below the Fed’s 2% target. The Dallas Fed expects headline inflation to come near 2% in the medium term, Mr. Kaplan said.

Mr. Kaplan highlighted in his speech global challenges facing major economies — including the U.S., Europe and China — like the interconnectedness of global markets, an aging workforce in many major economies, high levels of debt to GDP and disruption in many sectors due to new technologies.

“In light of these challenges, I have been suggesting that removal of accommodation should be done in a gradual and patient manner, based on a realistic assessment of progress toward achieving the Federal Reserve’s dual-mandate objectives regarding full employment and price stability,” he said.

The Fed has kept interest rates steady since raising its benchmark federal funds rate range to 0.25% to 0.5% in December. Although Fed officials declined to raise rates at their most recent meeting, they opened the door to an increase as early as September.

Mr. Kaplan is not a voting member of the central bank’s interest rate setting committee.

In his prepared remarks, Mr. Kaplan said that monetary policy has its limits.

He noted that in the U.S., monetary policy was actually less accomodative than it seems. Mr. Kaplan noted research that shows the neutral interest rate, or the rate that would bring about full unemployment while holding inflation steady, has been declining over the past several years.

“Monetary policy is not designed, by itself, to address the key structural issues we face today stemming from demographic changes, lower rates of productivity growth and high levels of debt to GDP as well as dislocations created by globalization and increasing rates of economic disruption,” Mr. Kaplan said.

He said at this stage, structural reforms should be looked at, like allowing more immigration to replace an aging workforce. He suggested that investments in infrastructure could help boost demand in the near term and more substantially increase productivity in the long run.

“Such policies have the potential to increase growth, which could boost the neutral rate,” Mr. Kaplan argued. “Improved growth expectations could help counter the forces holding down the neutral real interest rate, giving monetary policy makers greater scope for action without resorting to unconventional tools,” he said.